What is compliance risk management?

Why is compliance risk management important?

Effective compliance risk management is crucial for business sustainability and growth. Beyond simply avoiding fines and legal penalties, it builds a culture of integrity and accountability that fosters trust among customers, investors, and partners.

This trust is a valuable asset that enhances brand reputation and provides a competitive advantage. Proactively managing compliance risks also leads to improved operational efficiency, as it forces organizations to streamline processes and strengthen internal controls.

By embedding compliance (including a regular risk assessment) into strategic planning, companies can make more informed decisions, protect their leadership from personal liability, and ensure long-term resilience in an ever-changing regulatory environment. It’s not just a defensive measure: it’s a cornerstone of good governance and strategic success.

Potential risks of non-compliance

Compliance refers to following industry regulations. Rules and regulations are usually set by governments and legally enforced, but some sectors use private compliance frameworks. In all cases, regulations set standards for companies to follow and penalize organizations that fail to comply.

Non-compliance involves violating regulatory guidelines and failing to meet specific compliance requirements. Being in a situation of non-compliance has serious consequences. For example, non-compliant companies could experience:

Regulatory penalties

Regulators levy financial penalties or other sanctions on organizations that do not meet required standards. And these punishments can be significant. For example, healthcare company Anthem received a $16 million fine under the Health Insurance Portability and Accountability Act (HIPAA) in 2018.

Financial companies must also comply with international sanctions and anti-money laundering laws. Non-compliance penalties in these situations can be substantial. For instance, the Dutch government fined ING $897 million in 2018 for breaching anti-money laundering laws. And BNP Paribas had to pay an $8.9 billion fine in 2014 for breaching US-imposed sanctions.

The cost of penalties is not limited to regulatory fines. Companies that violate regulators must spend money on remediation work. This includes legal and auditing costs or the price of bringing in expert consultants.

Reputational harm

Non-compliant companies suffer a loss of trust among customers and partners, which can be devastating for the organization concerned. One 2021 study by Okta found that 88% of respondents would stop buying products from a company that exposed their data. In competitive marketplaces, this is something few businesses can afford.

Companies cannot keep data breaches or regulatory fines secret. Customers spread the word on social media. Data loss is a major news item, and media outlets constantly carry stories about reckless data management. So non-compliance will filter through into a company’s business prospects.

Operational problems

Non-compliance can create supply chain bottlenecks when regulators detect violations. For example, companies that ship abroad must comply with customs regulations. They must ship products safely, avoid restricted items, complete paperwork, and pay relevant duties. If not, their shipping operations can grind to a halt.

Failure to comply with regulations can also damage general business efficiency. Cybersecurity regulations enforce high standards of data and network protection. Non-compliant companies often suffer network downtime due to poor security. Poor network management may also lead to inefficiencies in other areas.

Criminal prosecution

Poor compliance risk management can lead to prosecution and imprisonment in some cases. Not all regulations carry criminal penalties, but breaches of HIPAA or the Sarbanes-Oxley Act (SOX) can result in prison terms.

Financial losses

The consequences listed above all lead to financial damage. Calculating the exact cost of non-compliance is not simple, but experts suggest the cost of non-compliance averages $15 million per company. Putting in place compliance strategies costs money. But these investments tend to outweigh the costs of not complying.

What are industry-specific compliance risks?

Compliance is not a one-size-fits-all challenge. Regulations differ between industries. This means that compliance risks vary as well. Let’s look at some important sectors and explain their core compliance risk management concerns:

Finance

Financial institutions have to deal with a complex array of regulatory risks. Compliance regulations affecting the financial sector include:

• Sarbanes-Oxley (SOX)
• The Gramm-Leach-Bliley Act (GLBA)
• The Dodd-Frank Reform and Consumer Protection Act
• The Bank Secrecy Act (BSA)
• The Anti-Money Laundering Act (AMLA)
• Investment Company Act of 1940

Financial companies must also follow guidelines laid down by the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Office of the Comptroller of the Currency (OCC). They are also covered by industry standards such as PCI-DSS.

These compliance requirements mean finance companies must:

• Ensure transparency and provide accurate reports to government agencies
• Prevent criminality within the banking sector
• Put in place protection for banking depositors and clients
• Protect client privacy and ensure data security
• Separate parts of financial businesses according to the law

Healthcare

The critical regulation for healthcare companies in the USA is the Health Insurance Portability and Accountability Act. HIPAA seeks to protect patient privacy and defines clear standards for companies that handle private data.

Health insurers must also follow reimbursement regulations, such as the Affordable Care Act, and may need to respond to guidance from the Centers for Medicare & Medicaid Services (CMS), which administers the Medicaid program.

E-commerce and retailers

Merchants must comply with regulations designed to protect cardholder data. The Payment Card Industry Data Security Standard (PCI-DSS) is one of the most significant industry standards for merchants. The PCI Security Standards Council, founded by the major card brands, maintains PCI DSS; the brands and acquiring banks enforce it. Breaches lead to damaging fines or suspension from payment processing systems.

Food and beverages

Producers of food and beverages must comply with Food and Drug Administration (FDA) regulations. The FDA administers a range of regulations relating to food safety and quality. The US Department of Agriculture (USDA) also regulates meat, poultry, and processed egg products.

Pharmaceuticals

Pharma companies have strict compliance obligations to ensure consumer safety. In some cases, drug producers must comply with HIPAA rules. The FDA regulates the labeling of consumer pharmaceuticals. It also manages the approval of new drugs and ensures that pharmaceutical companies test them thoroughly before they enter the marketplace.

Industrial manufacturing and energy

Large-scale industrial companies must comply with environmental regulations. Examples include the Clean Air Act and the Clean Water Act. Both regulate the emission and discharge of dangerous substances into the environment. And both laws are administered by the Environmental Protection Agency (EPA).

Industrial organizations must consider health and safety compliance risks as well. These risks are managed by the Occupational Safety and Health Administration (OSHA).

Types of risk management

Risk management is a diverse field, and compliance risk management is just one variety. Other types include:

• Enterprise Risk Management (ERM) identifies risks that apply across an entire organization.
• Financial Risk Management (FRM) only looks at risks that affect an organization’s financial health.
• Operational Risk Management (ORM) examines risks to routine operations and processes.
• Strategic Risk Management (SRM) assesses risks that affect a company’s strategic goals.
• Reputational Risk Management (RRM) identifies and mitigates risks to a company’s brand reputation.

Risk management strategies usually include two or more of the above approaches. For example, a compliance risk management plan might supplement an ERM strategy. Compliance risks also feed into RRM and SRM strategies.

Compliance is an overarching corporate challenge. Companies cannot protect their financial health or reputation without ensuring compliance. And long-term strategies must include compliance with emerging laws and regulations.

Compliance risk management best practices

Risk management must be systematic and comprehensive. But managing risks can be challenging. Follow these compliance risk management steps to control compliance risks and avoid gaps in your strategy.

1. Establish clear lines of oversight. Officers at the management level should supervise compliance risk management. Managing compliance risk requires the authority to change processes and technology in all parts of the business. And it also requires resources to make those changes. Only executive-level management can ensure this happens.
2. Create risk management structures. Effective risk management requires a structured approach. Use a compliance risk management approach involving flow diagrams, project milestones, and post-project auditing. Assess risks with risk mapping and key indicators. Use this information to identify the controls required to meet regulatory goals.
3. Take time to determine key risks. Good compliance risk management strategies connect mitigation measures with the most important compliance risks. Risks could include data breaches, system failure, malware infection, or even health and safety violations. Create a matrix containing each critical risk. Prioritize risks according to their potential consequences. Decide what controls are necessary. And create processes to implement and assess those controls.
4. Ensure information flows are smooth and effective. Managing risk relies on a free flow of information between employees and managers. Compliance teams should provide regular reports to managers. Whistleblowing and complaint systems should allow anonymous feedback from staff members.
5. Bring in outside testing experts. Companies are not always the best judge of their compliance status. Bring in external auditors and certified testing experts to verify that systems comply with regulations.

Following these best practices will help you create effective compliance risk management processes. Organizations should structure these processes around a carefully planned compliance risk management program.

What is a compliance risk management framework?

Compliance risk management frameworks explain the controls and processes companies use to achieve regulatory compliance. Framework documents bring together compliance risks across the entire business environment. They allow compliance teams to:

• Understand the most significant risks posed by rules and regulations
• Prioritize mitigation measures to work efficiently
• Assign risk management tasks to individuals within the organization
• Schedule compliance risk management projects and achieve milestones within predefined timescales
• Assess risk management continuously and change strategies if needed
• Comply with regulatory requirements regarding auditing and risk assessment

Key elements of a compliance framework

Every organization should use a compliance risk management framework. Companies often base their frameworks on external standards. For instance, many organizations use NIST SP 800-53 and the NIST Cybersecurity Framework (CSF) 2.0 to structure controls and risk management. Companies can create their own tailored systems. All risk management frameworks should include four critical elements:

1. A comprehensive compliance process

Organizations should base their compliance process on a full-scale compliance review. This review documents existing controls and policies. It assesses whether security controls and internal policies meet compliance goals.

If you are using an externally supplied risk framework such as NIST, compliance teams can cross-reference elements of this framework with internal processes. Cross-referencing saves time and helps to implement industry best practices.

Compliance officers use the review to recommend ways to make the organization compliant. Officers consider every relevant compliance risk. They decide what action to take about that risk, including avoidance or transferral if possible. And if controls are needed, compliance teams determine how to manage risks effectively.

The outcome of this review is the organization’s compliance process. The compliance process puts compliance risk management plans into action. Steps involved generally include:

• Policies that define how the organization complies with regulations.
• Controls and procedures that contribute to successful compliance.
• Training and auditing processes.

2. Participation from key stakeholders

Managers should be involved in agreeing and overseeing the compliance management framework. Their role should include drawing up a code of conduct and determining penalties for breaching compliance policies. Executive-level officers should sign off on the framework before it becomes operational. And they should provide the resources required to facilitate compliance processes.

3. Complaints and whistleblowing programs

Compliance frameworks should include feedback systems. Feedback from customers, partners, and employees will help companies comply with regulations. Whistleblowing is particularly important. Compliance teams must create ways for individuals to report concerns anonymously. These concerns should be documented and acted upon.

4. External assessment

Qualified experts should audit compliance management frameworks to determine their effectiveness. Audit and assessment frequency depends on the regime (e.g., annual under SOX 404; annual validation under PCI DSS; no fixed frequency specified under HIPAA). These exercises check compliance processes and compare them with regulatory demands. Managers should be involved in the audit project. They should also provide the resources needed to make changes to the recommendations of the external assessor.

How to use risk management frameworks

Companies can implement risk management frameworks by using specialist risk management technology. For example, risk management software automates basic tasks like scheduling document submissions or creating task management calendars.

Risk management software combines elements of the compliance strategy, including policies, controls, and risk spreadsheets. All identified risks will be visible and easy to manage.

With everything under central control, compliance teams can quickly check progress, add new tasks as regulations change, and assign resources based on priority or risk profiles.

Using centralized risk management software also encourages continuity. Risk management should be a continuous process. Compliance teams can maintain the flow of the compliance process via regular audits, risk assessments, and management consultations.

How do risk management and compliance management differ?

At this stage, it's important to differentiate risk management from compliance management. The two concepts are closely related but slightly different.

Risk management deals with all risks faced by the organization. This could include natural disasters, employee accidents, client privacy breaches, or even toxic chemical leaks. As we noted earlier, there are many forms of risk management.

Risks may not be covered by regulatory rules, but companies might still want to consider them to meet corporate goals. For instance, a footwear manufacturer may see using animal products as a business risk if its audience is mainly vegetarian, but this isn't a regulatory risk.

Compliance management deals with meeting regulatory requirements. Compliance risk assessment only seeks to comply with rules and regulations laid down by external authorities. This is a more focused approach than general risk management.

Conclusion: integrate compliance into risk strategy

Compliance risk management is part of the wider risk assessment process. Companies need robust processes to determine compliance risks and minimize the chance of legal penalties. However, risk management is not solely about meeting regulatory requirements. Companies have diverse goals and priorities. And each organization will minimize risks in a way that suits its business needs.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. The laws, regulations, and penalties discussed are subject to change and may have been updated since the time of publication. We recommend consulting with a qualified legal professional for guidance on your specific compliance needs.